Zero-rating foods: tough choices and compromised benefits

When the Davis tax committee published its final report on VAT earlier this year, it strongly recommended that the government not add to the list of food items that are zero-rated, a list that already includes 19 staples, from mealie meal and milk to pilchards and potatoes. The committee’s logic was that the existing zero ratings were well targeted to poor households and that the monetary benefit of any further zero ratings would go mainly to richer households; a better pro-poor strategy would be simply for the government to give the money directly to poor households by way of higher social grants or food vouchers, or a better school nutrition scheme.

Now, the panel of experts which the finance minister appointed in April to look at mitigating the impact of the February budget’s one-percentage-point increase in VAT has recommended that several more products be zero-rated. Zero-rating these would cost the public purse about R4bn in lost revenue each year — on top of the estimated R26bn already forgone because of the existing zero ratings.

Stellenbosch University’s Professor Ingrid Woolard, who chairs the panel of experts, is also on the Davis committee, but the contrast between the two reports is no reflection on the excellent research; rather, it reflects just how difficult the issues are. The panel of experts was tasked with considering which other items might be zero-rated, and given the protest that greeted the VAT hike, and the numerous submissions received, it was probably always going to have to recommend more zero-rating. But which items would benefit the poor more than the rich? Equity was one of the issues the committee considered and it is a difficult one, because except in the case of staples such as samp or paraffin, which are consumed almost exclusively by poor households, more affluent households benefit from zero-rating too; indeed, of the R4bn in relief from the extra zero-ratings the panel has proposed, the poorest 70% get only about R2.8bn. Even more complicated was the question of “merit” goods. The panel recommended the zero-rating of white bread because so many poor households depend on it, but expressed concern about the health issues around refined carbohydrates. Though poor households spend relatively more of their incomes on alcohol, tobacco and sugar than rich ones do, the panel wasn’t about to zero-rate these health hazards.

Then there was the vexed issue of sanitary pads and tampons, which are clearly a merit good, and for which the panel recommended zero-rating, in response to many submissions. The trouble is that reducing the price of a pack of tampons from, say, R23 to R20 without VAT isn’t going to make them any more affordable to poor girls and women, as the panel pointed out. National Treasury economists and others have long argued they should simply be given to the poor for free.

Chicken posed different problems and divided the panel, which ended up recommending against zero-rating. Chicken is a healthy protein and poor households consume a lot of it. But just zero-rating this would mean another R2.1bn in lost revenue and the panel’s concern was that the market is dominated by just two players, which might not pass on the benefit to consumers.

But the more profound issue is whether there should be zero-rating at all. The risk is of a vicious cycle developing in which the government has to keep hiking VAT because more and more of the revenue is lost by zero-ratings. As it is, it is not clear how the finance minister will accommodate the cost of extra zero-ratings if he follows the panel’s advice. Even if money were available, there is arguably a strong case for him to give it directly to poor households through grants or food vouchers or school nutrition. But delivering those effectively depends on a capable, clean state, which nobody can be too sure about.

There was the vexed issue of sanitary pads and tampons, which are clearly a merit good